Restrictive Covenants: Restraints of trade clauses


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Aitken Whyte Lawyers Brisbane - Employment Law Lawyers And Solicitors For Brisbane, Queensland

What interests do restraints protect in Employment contracts?

Restraint of trade clauses are generally used to safe guard staff relationships formed between employers and employees about customers and to protect confidential information. They are common provisions in employment contracts. They need to be drafted carefully though as otherwise they may not be enforceable. It is important to have a lawyer consider the specific terms in drafting the restraint in the employment contract, or consider whether they are enforceable.

These restrictions are generally necessary once an employee ceases his or her employment and can be used to restrict or prevent a former employee from gaining alternative employment or taking hard earned clients of an employer’s business or poaching other employees.

How is the employee restricted?

An employer will generally attempt to restrict a former employee in the following ways:

  • where the former employee works (the location)
  • the non-disclosure of confidential information or trade secrets acquired by the former employee during their employment
  • the non-solicitation of customers or employees of the employer
  • a time period in which the former employee cannot work for a competitor.

What public policy considerations are relevant to restraints of trade?

The starting point is that a restraint clause in an employment contract that imposes obligations on an employee following termination is void at common law. Public policy considerations restrict the range of restraint clauses. The responsibility is on the employer to convince a court that the clause is reasonable and therefore valid and enforceable. In NSW courts have a wide discretion to modify restraint of trade clauses under legislation, namely, the Restraint of Trade Act 1976. That’s not the case in Queensland however.

When is a restraint of trade reasonable and enforceable?

As noted above a restraint of trade clause is usually considered to be void (that is, unenforceable). Although, a restraint clause will not be void if it poses no greater restraint than that which is reasonably necessary for the protection of legitimate interests of the party asking to enforce it (Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40). The intention of the parties may also be relevant when assessing reasonableness. The emphasis is usually on the party seeking to enforce the restraint to prove that it is reasonable.

What can an employer protect?

Trade secrets, confidential information and the goodwill of the business, that is, the customer relationships the employee has created, are considered legitimate and can be protected by the employer. Trade secrets are the knowledge of information unique to a business which an employee acquires when working for the employer. Generally, this does not extend to the special skills an employee might attain while working for an employer.

What are common restraint of trade clauses?

The two most common restraint of trade clauses are non-competition clauses and non-solicitation clauses.

Non-competition clauses prevent a former employee from working for a competitor in a certain area for a length of time. However, to do this the employer must prove that there is a legitimate interest to protect.

Non-solicitation clauses prevent an ex-employee from soliciting the employer’s former clients, customers or other employees to follow them to their new business or role.

What are the remedies for employers?

An ex-employer may seek an injunction against the former employee to limit any further breach of the restraint. The court may also award damages for the breach of the restraint. Damages can also be awarded as an account for profits. The court may also make an award for ancillary damages.

What factors are considered?

When determining whether a restraint is reasonable, the court will consider the particular circumstances of each case, together with these factors:

  • The negotiation process – what was said during the negotiation of the restraint clause;
  • The length of the restraint – Depending on the duration of the restraint it may be deemed to be unreasonable;
  • Characteristics of the employer’s business – if it is a situation where the employee is in constant contact with employees, it is probable it will be deemed fair in the circumstances;
  • The location or area of the restraint – if the restraint covers too wide an area it is likely that the restraint will be found to be unreasonable.
  • The words themselves – are they certain?

Aitken Whyte Lawyers can assist you in determining whether any restrictive covenant or restraint of trade clause is enforceable and what remedies there may be including damages and injunctive relief. We can also assist in drafting or negotiating such provisions and have substantial experience in such matters.

Obtaining legal advice before agreeing to restraints or taking action that may impact on a restraint clause is important so you know your rights and what the repercussions may be. Aitken Whyte Lawyers can assist you with any disputes relating to employment contracts and restraint of trade clauses.

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